Report: interest rates to hit 9% by 2013

The Australian economy may be rebounding but that’s no reason for mortgage-holders to celebrate, according to a new BIS Shrapnel report, which predicts that inflationary pressures will force mortgage interest rates above 9% within three years.

In its Long Term Forecasts, 2010 – 2025 report, BIS Shrapnel predicts that economic growth will accelerate to average 3.8% annually between now at 2013. The report also forecasts that our unemployment rate, which currently stands at 5.3%, is set to fall below 4% by early-to-mid 2013.

This sounds like good news on the surface, as it points to a strong recovery in our local economy, but BIS Shrapnel warns mortgage holders to prepare for higher interest rates as a result.

BIS Shrapnel senior economist and report author Richard Robinson points to tightening labour markets and increases in household spending as the main drivers that will lead to higher consumer price inflation (CPI).

An increasing CPI will prompt the Reserve Bank to force interest rates north – and Robinson forecasts that the cash rate is likely to inch towards 6.5%, up from its current level at 4.5%.

This would push housing interest rates above 9% once again, meaning monthly repayments on an average $300,000 mortgage would climb from $2,120 to $2,520.

If you think that a change in government leadership might make a difference, then think again, Robinson adds: he believes that the impending final result of the Federal Election will have little impact on the future of Australia’s economy, because whichever party forms government will continue to face a familiar set of policy issues over the next three years.

“We still have a number of critical policy issues that need to be addressed, including a serious housing shortage, ongoing infrastructure deficiencies and bottlenecks and, of course, a skills shortage,” he says.

These issues will ultimately manifest as serious inflationary pressures, and Robinson says higher interest rates will almost certainly result as a consequence.

On the plus side, homeowners can expect to enjoy a surge in their property’s value – for the short-term, at least.

Robinson says the current undersupply of housing is not likely to be addressed, given that mortgage rates are already around neutral levels.

The resulting combination of significant pent-up demand, strong rents, rising incomes and an easing in funding for property developers is expected to sustain a recovery in housing activity over the next two to three years.

However, he also predicts that the housing market will enter a “controlled downturn” in by 2014, once higher interest rates take hold.

“Labour shortages and a synchronisation of construction cycles will lead to a build up of inflationary pressures… and the RBA will be forced to respond,” he says.

“By raising interest rates to a maximum of 6.5% that will take mortgage rates back over 9% and send housing activity into a controlled downturn over 2013/14.”

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